Overview
The One, Big, Beautiful Bill Act (OBBBA) brought sweeping tax changes effective for tax years 2025 through 2028, including new deductions for qualified tips and qualified overtime. These apply even if you take the standard deduction. The IRS issued guidance in Notice 2025-69 and published Schedule 1-A and updated Form 1040 instructions to let taxpayers claim these new deductions. (irs.gov)
Who Qualifies
- You must report tips and/or overtime: tips through W-2, 1099, or Form 4137; overtime must be required under the Fair Labor Standards Act (FLSA). (irs.gov)
- You must include a Social Security number; if married and filing jointly, both spouses must qualify. (irs.gov)
- Income phase-outs: MAGI (modified adjusted gross income) over $150,000 (single) or $300,000 (joint returns) triggers phase-out. (irs.gov)
How Much You Can Deduct
| Deduction Type | Max for Individual | Max for Joint Filers |
|---|---|---|
| Qualified Tips | $25,000 | $25,000 |
| Qualified Overtime (portion over regular rate) | $12,500 | $25,000 |
These apply whether or not you itemize deductions. (irs.gov)
Examples
- Waiter with Tips: Ann receives $18,000 tips reported on her W-2 and has MAGI below thresholds. She can deduct the full amount since it’s under the $25,000 cap. (irs.gov)
- Highly Paid Hourly Worker: Brad earns $200,000 in wages, $20,000 overtime. Maximum deduction for overtime is $12,500; since his MAGI is above threshold, his deduction phases out. (irs.gov)
Transition and Penalty Relief
- For tax year 2025, existing forms (W-2, 1099) will not include separate fields for tips/overtime deductions. Instructions provide worksheets and examples. (irs.gov)
- Employers/payors are given penalty relief if they cannot supply the separate accounting for tips or overtime. (irs.gov)
Actionable Advice
- Keep accurate records: tip logs, pay stubs, overtime statements—even if employer doesn’t provide a separate form.
- Assess your MAGI early: estimate whether deductions will phase out and plan accordingly.
- Tax software or tax advisor: ensure they are using the new Schedule 1-A and updated Form 1040 instructions.
- Employers: consider voluntarily including occupation codes, overtime and tip breakdowns—even though 2025 enforcement is relaxed.
Bottom line: Most tipped employees and hourly wage earners will see reduced taxable income thanks to these new deductions—but they must follow rules carefully and maintain good records.